Virgin Media Buying Back Shares - Analyst Blog

Virgin Media Inc. (VMED), a leading cable MSO and broadband service provider in the U.K., is aggressively conducting share repurchase program, which was aimed to raise its shareholders’ wealth. On July 28, 2010, Virgin Media announced that the company has targeted a leverage ratio of Net Debt-to-Operating Cash Flow of approximately 3.0x within the next 2-3 years. Management will try to achieve this target leverage ratio through strong free cash flow generation as well as certain capital optimization policies.

Capital Return Program

Capital Optimization Policy will have two wings (1) an initial capital return program of GBP 700 million (approximately $1,086.5 million) (2) Schedule debt amortization of GBP 525 million (approximately $815 million) within 2011-2013. The board of directors of Virgin Media has authorized a share buy-back program of GBP 375 million (around $582 million) within the next 12 months. The rest GBP 325 million (around $504.5 million) of the total GBP700 million package will be used to repurchase the company’s existing convertible debts.

Immediate Share Buy-back

Ongoing massive share buy-back activity is a part of the company’s previous announcement that it will initiate an accelerated stock buyback program to purchase GBP 125 million (approximately $194 million) of the company’s common stock. This decision will reduce the company’s total outstanding share count by nearly 10 million.

Strong Cash Flow

We believe Virgin Media has moved ahead with this huge capital return program supported by the company’s strong cash flow. During the second quarter of 2010, Virgin Media generated approximately $554.6 million of cash from operations, up 12.9% year over year. Free cash flow was $163.4 million, up 37.3% year over year. High-margin Retail data revenue was around $94.5 million, up 26.3% year over year.

In last July, the company sold the Virgin Media TV business to British Sky Broadcasting for around $234 million. It has also decided to offload its full 50% stake in the UKTV. Virgin Media valued its 50% stake in UKTV at approximately $560 million.

Our Take

Virgin Media is the first quad-play service provider in the U.K. offering television, fixed-line telephone, broadband, and mobile telephone services. In our view, the company is in the early stages of a turnaround, poised to generate strong free cash flow and improved EPS going forward. Virgin Media is systematically upgrading its content delivery network to support large-scale IP traffic.

Virgin Media is all set to introduce super-fast EuroDOCSIS 3.0 network offering a downstream speed of 100 Mbps and an upstream speed of at least 10 Mbps by the end of 2010. In another major development, management declared that it has decided to extend the trial run of more advanced 200 Mbps broadband network in Coventry.

All these developments, we believe, will boost the company’s revenue and cash flow. We maintain our Neutral recommendation for Virgin Media. It is a short-term Zacks #3 Rank (hold) stock.

VIRGIN MEDIA (VMED

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